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GCR affirms Omnia Holdings Limited's rating of A-(ZA); Outlook Stable

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Published: Wednesday, 23 August 2017 12:19

SUMMARY RATING RATIONALE

Omnia Group Investments Limited (“Omnia Investments”) is a wholly owned subsidiary of Omnia Holdings Limited (“Omnia” or the “Group”), the JSE-listed entity. In turn, Omnia Investments owns an effective 86.5% stake in Omnia Group (Pty) Limited, which is the holding company for the various operating businesses within the Group. In view of the direct and integral linkages that exist between the operating companies housed under Omnia Group (Pty) Limited, Omnia Investments and Omnia Holdings Limited, Omnia Investments’ Issuer ratings are directly aligned to those assigned to the Group.

Global Credit Ratings (“GCR”) has therefore accorded the above credit ratings to the Group and to Omnia Investments based on the following key criteria:

The ratings take cognisance of Omnia’s well-established market position as a leading producer and supplier of agro-fertilizers, mining explosives, as well as mining and other speciality chemicals with wide-ranging industrial applications. This is supported by a vertically integrated operating model, continual investment in modernising/enhancing manufacturing capacity, and the Group’s focus on maintaining a differentiated, client-focused offering.

Omnia is inherently exposed to the cyclicality of the agriculture and mining sectors. Accordingly, and against the backdrop of a fragile domestic economy and subdued commodity prices, top line performance has been restrained in recent years. Specifically, revenue declined by 3% to R16.3bn in FY17, despite strong sales volumes reported by the agriculture segment and relatively strong mining contract retention.

Pricing pressure persisted into FY17, with margin compression also arising from an overpriced core input (the subject of an ongoing legal dispute), and lower than planned uptake of raw materials from the nitric acid plants by the Group’s mining segment (amongst other factors). The gross margin remained stable, at c.21% (albeit two basis points below the five-year high), reflective of production efficiencies. However, the normalised EBITDA margin eased further to a new low of 8.7% (FY16: 9.1%). Looking ahead, moderate revenue growth is expected to derive from the R780m Umongo Petroleum transaction and other acquisitions, as well as the R750m nitrophosphate facility, which will quadruple capacity, reduce reliance on external suppliers and drive material cost savings.

Omnia remained in a net ungeared position at FY17, while gross gearing and gross debt to EBITDA rose to 18% and 85% respectively, from the review period lows of 5% and 22% reported at FY16. Although facilities to fund the Umongo Petroleum acquisition and the new plant are expected to raise term debt well above the negligible levels reported historically, net debt to EBITDA and net debt to equity are projected to remain within management’s comfort levels of 2x and 35-40% respectively.

Barring working capital variability and associated currency movements, Omnia’s legacy operating entities have historically generated sound free cash flows (totalling R5.8bn over the review period), a trend which should be sustained in the medium term. Debt serviceability was sound at FY17, but a comfortable debt maturity profile will be required to ensure these metrics remain at adequate levels, and to absorb any earnings variability. GCR has also taken cognisance of ample untapped facilities available to the Group, and long-standing relationships with highly rated financial institutions.

Looking ahead, upward rating pressure could arise from the proven ability to achieve and sustain robust margins, on the back of operating efficiencies derived from capacity enhancement, the successful integration of acquired entities and improved plant reliability, supporting strong free cash flows through the cycle. Conversely, materially elevated gearing beyond internal comfort levels to fund strategic investments or arising from unforeseen territorial risks would be negatively viewed. Price volatility, adverse regulatory changes, and/or other environmental factors that materially curtail operating performance and debt serviceability metrics would also result in a downgrade. Any factors impacting the Group’s Issuer ratings would have a direct and corresponding impact on the ratings accorded to Omnia Investments.